Historians know that September is the cruelest month of the year for both the Dow and the S&P500 (see chart nearby). The Dow suffers through June and August as the 2nd and 3rd worst months; The SPX shares that fate in February and August. October is not as fearsome as its reputation; It is all the crashes which have taken place in the 10th month that makes investors so nervous.

Will September hold true to form this year?

Lets review a few key factors:

1) Volume: As we have noted in the past, low volume continues to be problematic. With vacations over, the moment of truth is now upon us. If the teasing gains from last month are to be sustainable, than markets require the active participation of big institutions. We will know that’s occurring only when substantial volume returns;

2) Moving Averages: The SPX and the Dow have both managed to climb just above their 50 and 200 day moving averages; The Nasdaq, weakened by the Semis, is still well below. Nasdaq needs to penetrate 1875 to get above its 50dma, and breach 1975 for its 200dma; These are general indicator of market’s health. It is simply a good indicator when the indices are above their moving averages;

3) Oil: remains in a long term uptrend[1], despite the recent pullback. Until there is a definitive trend break, expect oil to stay much higher than the $30-35 barrel target. The market has already discounted $45 Oil, but it has yet to do so for the $50-60 range; Oil needs to stay below the ½ century mark if this rally is to have any legs;

4) Dow Transports: The strength of the Dow Transports -despite Oil’s rise – has confounded veteran market watchers. Last week, the Transports rose above their August highs. This produces a confirmation of the Industrial’s strength August, according to Dow Theorists. That bodes well for the intermediate term;

5) Pre-announcements: Q3 earnings should be strong by most measures – except for year-over-year comparables. The recent economic deceleration suggests we could be in for a rocky pre-announce season. That sets the stage for a possible retest of the lows this month or in October;

6) The Fed: Should the Fed’s tightening bias continue? Inflation appears to be tame, and the economy is obviously cooling off. Perhaps the Fed needs to step off the brakes.

The next few weeks will be crucial to how the market behaves for the rest of the year . . .